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A GST audit is an examination of a registered business’s records; a show cause notice (SCN) sets out allegations and asks the business to respond before a tax liability or other consequence is determined. An audit finding is not, by itself, a final demand. This guide concerns Indian GST under the CGST Act; corresponding State or Union Territory GST provisions and the IGST framework may also be relevant.
How an audit and a show cause notice differ
| Point | Section 65 department audit | Show cause notice |
|---|---|---|
| Purpose | Examine compliance and check declared turnover, tax paid, refunds, input tax credit (ITC), and related records. | State the department’s proposed case and give the recipient an opportunity to answer it before adjudication. |
| Legal stage | Review of records and compliance under section 65 of the CGST Act. | Demand proceedings under the provision cited in the notice. Sections 73 and 74 are relevant to the circumstances described below; the applicable provision depends on the tax period and current law. |
| Typical document | Form GST ADT-01 is the audit notice; Form GST ADT-02 communicates the audit conclusion. | The demand notice identifies the allegations and proposed amounts. If the proceedings continue, an adjudication order may follow. |
| What the business does | Make the relevant books, returns, and supporting records available and respond to audit observations. | Answer each allegation by the deadline in the notice, with facts and supporting documents. |
| Possible result | Findings may prompt further action under an applicable demand provision, but are not automatically a final demand. | An adjudication order may determine tax, interest, and any applicable penalty, subject to statutory limits and procedure. |
The audit purpose and procedure are set out in section 65 of the CGST Act and the Assessment-Audit Rules and ADT forms. Demand notices and the related safeguards appear in the CGST Act provisions on demands and adjudication.
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What happens in a section 65 audit
A section 65 audit can take place at the business premises or at the tax office. The officer examines records supporting the accounts and returns, including turnover, exemptions and deductions, tax rates, ITC, refund claims, and other relevant matters. The audit period under the rules is a financial year or multiples of a financial year.
Statutory audit timelines
- The registered person must be informed at least 15 working days before the audit.
- The ordinary completion period is three months from commencement. The Commissioner may extend it by up to a further six months if reasons are recorded in writing.
- For this purpose, commencement is tied to the later of the date records are made available and the date the audit actually begins at the business premises.
- Within 30 days after the audit concludes, the proper officer must inform the registered person of the findings, rights and obligations, and reasons for the findings.
These are the statutory periods described in the cited Act text; check the applicable law and the particulars of the audit communication for the case at hand.
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Audit observations and conclusion
If the officer notices discrepancies, they may be communicated as audit observations. The business may reply, and the officer is to consider that reply before finalizing findings. The conclusion is communicated in Form GST ADT-02. If the audit detects specified tax or credit issues, section 65(7) permits the proper officer to initiate action under the applicable demand provision; the audit communication and the later demand notice remain distinct procedural steps.
Special audit is a different procedure
A special audit under section 66 is not the ordinary section 65 audit. In specified circumstances, an officer not below Assistant Commissioner rank may, with prior approval of the Commissioner, direct an audit by a nominated chartered accountant or cost accountant. The direction and findings use Forms GST ADT-03 and GST ADT-04, respectively.
What a show cause notice alleges
A notice tells the business what it must answer: the alleged short payment or non-payment of tax, erroneous refund, or wrongly availed or utilized ITC, along with the proposed interest and any applicable penalty. The cited section and the tax period matter.
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Sections 73 and 74 in the reviewed text
- Section 73 addresses those specified tax or credit issues for reasons other than fraud, wilful misstatement, or suppression to evade tax.
- Section 74 addresses those issues where fraud, wilful misstatement, or suppression to evade tax is alleged.
A section 74 citation states the department’s allegation; it does not, on its own, establish that the business committed fraud or suppression. The CGST Act provides procedural safeguards: where the Act’s specified circumstances require it, an opportunity of hearing must be granted; an adjudication order must state the relevant facts and its basis; and the tax, interest, and penalty in that order cannot exceed the amounts in the notice or be confirmed on grounds outside those stated in it. These protections do not replace the need to answer the allegations within the stated deadline.
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What to do when an audit communication or notice arrives
- Identify the document and stage. Check whether it is Form GST ADT-01, an audit-observation or findings communication such as ADT-02, a special-audit form, or a demand SCN. Note the issuing authority and the statutory provision cited.
- Write down the period and deadline. Record the tax period, response date, and any instructions in the actual communication. Keep proof of service and delivery; audit timelines and a notice’s response deadline are not interchangeable.
- Preserve the relevant records. Depending on the issue, gather returns, ledgers, invoices, reconciliations, ITC support, refund documents, and related correspondence for the period in question.
- Reconcile each issue separately. Compare the department’s proposed treatment with the books, returns, and source documents. Prepare a point-by-point explanation and identify the evidence supporting each response.
- Review the legal basis and hearing question. For an SCN, check the exact section, amounts, allegations, and applicable hearing rights. Where appropriate, request a hearing in writing. Consider qualified GST professional advice if the amount, legal interpretation, or factual dispute is significant.
- Keep a complete procedural file. Retain the filed response, acknowledgment, hearing records, and any order. Check the actual order and current law for any appeal right and deadline; do not infer them from audit timelines.
Check the law for the relevant tax period
The sections 73 and 74 framework described above is not necessarily the right framework for every current tax period. Section 74A is relevant to newer periods, but the exact deadlines, penalties, and payment provisions should be verified against the current consolidated CGST Act, commencement notifications, and applicable rules before relying on them. The CBIC consolidated Act PDF dated 1 August 2021 is an older text and should not be treated as a complete statement of current law. For current materials, consult CBIC’s CGST Act page and the rules applicable to the period.
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